Before someone buys a business, one of the first questions to answer is what exactly is being bought. Most attorneys will recommend that a buyer purchase the assets of a business rather than the stock or limited liability membership interests.

Buying only the assets limits the potential liability of the purchaser. This is because purchasing the ownership interest in a business entity brings with it all of its liabilities, known and unknown. This often includes debts of the business but can also include actual or potential lawsuits, agreements with third parties, and other obligations. For the most part, however, the payment of fair market value for the assets of a business will allow a transfer free from such liabilities.

Even when one purchases the assets of a business, some liability may follow. For instance, if the seller has given a perfected security interest in an asset, such as a piece of equipment, that liability is likely to follow the asset. In most cases, but not all, a Uniform Commercial Code (“UCC”) search will uncover perfected security interests. Still, it is important to remember that a UCC filing is not the only way to perfect a security interest. For instance, in certain cases, a security interest in an asset may be perfected by taking possession of it. Therefore, if a wholesaler that sold the inventory in question has it in “bill and hold” the wholesaler may have a perfected security interest in those goods, even if it has not filed that security interest with the secretary of state.

Purchasing a business’ assets may result in the purchaser being liable for any unpaid sales tax owed by the seller, if the purchaser does not follow the steps outlined in section 1141 of New York’s Tax Law.  The sale, transfer or assignment of business assets, in whole or in part, other than in the ordinary course of business, by a person required to collect sales tax is called a “bulk sale.”  This includes tangible personal property, real property, and intangible assets such as goodwill. At least ten days before paying for or taking possession of any business assets, the purchaser must notify the Tax Department by filing Form AU-196.10 (the “Notice of Bulk Sale”) via registered or certified mail return receipt or by hand delivery to the Department of Taxation and Finance in Albany.  It is important to have a record of when the notice is delivered because the obligation is time-sensitive and the burden of showing that the notice has been received lies with the purchaser. 

Within five business days after receiving the Notice of Bulk Sale, the Department will issue to the purchaser a Form AU-197.1, Purchaser’s and/or Escrow Agent Release – Bulk Sale, if the seller does not have any unpaid sales tax-liability and the Department has determined an additional audit or review is unnecessary. A purchaser who receives this form from the Department will not be held liable for any unpaid sales taxes of the seller, although any property purchased may still be subject to a lien if there is an outstanding warrant or judgment against the seller for past unpaid taxes. 

On the other hand, if the seller owes unpaid sales tax or if the Department wishes to conduct a further review or audit, it will issue a Form AU-196.2, Notice of Claim to Purchaser. A purchaser who receives this should not pay the seller until the Department authorizes the release of the funds. Rather at the closing, the purchaser should place in escrow the full amount of the purchase price or so much as the Department directs up to the full fair-market value of the assets purchased. If the purchaser does not, it will be liable for the greater of the fair-market value of the assets transferred or the full amount of the purchase price paid.

In addition, the purchaser must register with the Department and obtain its own Certificate of Authority to Collect Sales Tax. Certificates of Authority are not transferable. The purchaser must also pay the sales tax due on the tangible personal property it purchased, which is subject to sales tax.